Are you looking for shorts? Watch these 4 stocks

  • September 13, 2005
  • Thomas Neuhaus

On Monday,
I gave several reasons why I believe the Energy Sector could begin a relatively
sharp correction.  I am following up with some individual stocks
which I believe are overextended and could turn down if the oil sector rolls
over.  I am not recommending short sales of these stocks, but rather, offering a
warning to traders that the trends are stretched and are hitting “hidden”
resistance from the top of the rising trend channels.  

First, I want to highlight the Energy Sector
Bullish Percent chart, which measures the percent of stocks on a buy signal
according to point and figure analysis.  Currently, 96 percent of the S&P Energy
Sector stocks are on a buy signal.  The last time the sector was this overbought
in March of this year (the number 3 on the chart represents the month), the Oil
Services Index and S&P Energy SDRS began a two-month, 16% correction.   

The following charts all have a similar theme. 
All are beautiful stock charts in strong rising channels.  However, all are
starting to stall at the upper trendline of the channel.  Valero
(
VLO |
Quote |
Chart |
News |
PowerRating)
and Chesapeake Energy
(
CHK |
Quote |
Chart |
News |
PowerRating) are rising on extreme volume spikes,
indicating that speculative activity is increasing and making the stocks
vulnerable to a sharp pull back.  Two other energy stocks, Anadarko Petroleum
(
APC |
Quote |
Chart |
News |
PowerRating) and Noble Energy
(
NBL |
Quote |
Chart |
News |
PowerRating), have risen on weaker volume and are
also very overextended.   

09/12/2005

The one chart that does not look like the others
is Schlumberger
(
SLB |
Quote |
Chart |
News |
PowerRating).  The stock is an institutional investor
favorite because it is one of the few large-cap oil services stocks that is
liquid enough for large funds to build a position.  The stock is not nearly as
over extended as some of its smaller cap peers but the stock does look
vulnerable to a correction.  The Chaikin Money Flow and Accumulation
Distribution line show that institutions haven’t bought into the last rally.  
If you believe institutions represent the “smart money,” the mixed volume trends
show they are not chasing the stock higher like traders and retail investors.   

Again, my intent is not to short these strong
momentum stocks.  Rather I want to  warn traders that the first dip might not be
a buying opportunity because energy stocks are extremely overextended, sentiment
is extremely positive and a more serious correction could be in the works.  

Thomas Neuhaus

Thomas Neuhaus is a principle of Investment
Management of Virginia, a registered investment advisory firm for which he
co-manages. Mr. Neuhaus’ career has encompassed all aspects of the investment
business from investment banking to sell-side research to buy-side portfolio
manager.